MARKET ROUT CLAIMS NEW VICTIM / THE NEW YORK TIMES ( VERY HIGHLY RECOMMENDED READING )

MARKETS

SEPTEMBER 24, 2011

Market Rout Claims New Victim

Investors Dump Gold, Silver to Pay for Losses; All Eyes on IMF This Weekend

By LIAM PLEVEN, JONATHAN CHENG and TOM LAURICELLA


The wave of selling that has washed over financial markets in recent weeks swamped precious metals on Friday, sending gold and silver prices plummeting and raising the stakes for key weekend meetings of global finance officials.

Gold and silver prices have seen sharp declines lately, but Barron's economics editor Gene Epstein says the long-term value of the commodities still shines.

In the past week, the Dow Jones Industrial Average plunged 6.4%, its worst week since October 2008. Currencies, too, have had a wild ride. The dollar this month has soared against its rivals. The euro has tumbled 6% in September, while emerging currencies like Brazil's real have been punished.

Gold futures dropped 5.8% Friday, the biggest one-day loss in five years, as investors rushed to cash out of some of their most profitable investments in the hopes of making up for losses elsewhere. The decline capped gold's worst week since 1983. Silver was even harder hit, plunging 18% for its largest single-day decline since 1987.
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Precious metals posted deep losses as investors continued to leave the market in favor of cash. Comex silver for September delivery dropped $6.4870, the worst dollar-decline since 1980. Liam Denning has details on The News Hub.

The week highlighted a growing sense of despondency among investors concerned that policy makers have neither the will nor power to juice their economies.

The broad market declines have added pressure on finance ministers and central bankers as they gather for the International Monetary Fund's annual meeting in Washington this weekend.

"We are in a red zone," said World Trade Organization chief Pascal Lamy, one of many officials attending the meeting. "We are at risk of repeating what happened in 2008"—when market upheaval shook the global economy—"occurring again for different reasons but through the same channel, the financial system."

Friday's exodus from gold and silver underscores the unpredictable and volatile nature of financial markets in recent weeks.

Investors have grown increasingly skeptical of policy makers' ability to revive the global economy, and of their willingness to bring about a resolution to the European debt crisis.


The broader rout has left many investors with unexpected losses, driving some to part with some of their better performing investments, among them gold and silver.


The declines are a turnabout for gold, in particular, which has recently found strong demand in good times and bad. It has enjoyed a special status as a safe haven from financial crisis and political turmoil, as well as a hedge against inflation.


Gold has risen six-fold in the past decade, including a 15% gain this year. In August, it reached a nominal record of $1,888.70 per troy ounce, rising on a trajectory that many had speculated could not last.


Gold settled at $1,637.50 an ounce, down 9.6% for the week. Silver, which had risen 28% this year by the end of April, settled at $30.05 per ounce, falling into negative territory for the year.

Fears of a possible Greek default and the U.S economy dipping back into recession pushed the blue-chip index to its worst weekly decline in nearly three years. Brendan Conway has details on The News Hub.

Some hedge funds were selling to raise cash to meet margin calls from lenders. Other investors were using proceeds of silver and gold sales to replenish other parts of their portfolios, which had fallen in value in recent sessions, said George Gero, precious metals strategist at RBC Global Futures.

In addition, it appeared that European banks were selling gold, possibly in order to raise cash and shore up their balance sheets, Mr. Gero said. This selling was then magnified by so-called momentum traders whose strategy is to piggyback on moves up or down in price.

Silver faces the added woe of being widely used in industry, and therefore vulnerable to fears that weak economies will consume less. Moreover, the Shanghai Gold Exchange said Friday that it will expand the upper and lower trading limits for its silver contract.

Exchange-traded funds that invest in, and track, the metals also have helped investors move quickly in and out of gold and silver.
"It feels like there's tremendous macro headwinds for the metals," said David Lutz, managing director at Stifel Nicolaus.

The recent downdraft for precious metals came after the Federal Reserve this week acknowledged the economy is in worse shape than it thought, a sign that inflation will be of no concern for some time. As well, economic data out of China and Europe indicated that the global economy continues to lose steam.

"What's exacerbating the situation right now is that the global economy is in bad shape," said Andreas Utermann, global chief investment officer for money manager RCM, a subsidiary of Allianz Global Investors.
On Friday, members of the Group of 20 industrialized and developing nations met to see what measures they could devise to boost confidence in financial markets. But there was little expectation that they would produce anything concrete.
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The euro fell from nearly $1.38 to end the week at $1.35, and German, French and British stocks all fell too. Stocks in Hong Kong and Seoul fell, too, and the Shanghai Composite suffered its fourth straight week of declines. The Korean won tumbled 9.3% against the dollar, forcing the central bank to intervene.

In the U.S., the Dow's declines this week take the blue-chip index down 18% from its late-April highs. On Friday, the Dow rose 37.65 points, to 10771.48.

The fact that gold is falling along with other assets complicates life for those who bought gold because they thought it would rise or fall independently.

"There is nowhere really to hide at the moment," said Fredrik Nerbrand, global head of asset allocation at HSBC.
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—Matt Phillips and Bob Davis contributed to this article.